Home » Unlabelled » Regulations for Payday Loans in UK

Regulations for Payday Loans in UK

Under the Consumer Credit Act 1974 lenders must have a licence from the Office of Fair Trading (OFT) to offer consumer credit. The Consumer Credit Act 2006 explicitly requires the OFT to consider irresponsible lending in its evaluation of whether a lender is fit to hold a licence. There are no restrictions on the interest rates payday loan companies can charge, or on rolling over loans. Advertising of payday lending is subject to the Consumer Credit (Advertisements) Regulations 2004. This means that the "typical APR" must be stated in adverts which meet certain criteria, such as adverts which indicate that credit will be given to customers who may otherwise find access to credit restricted. Advertising is regulated by the Advertising Standards Authority (ASA), and there have been several cases of the ASA upholding complaints against advertising by payday lenders.

In June 2010 the Office of Fair Trading published a 'Review of high-cost credit'. In this report they concluded that changes could be made to the industry itself, but that "more radical approaches would be required if the Government or others wanted to tackle the wider social, economic and financial context in which high-cost credit markets exist."

To get a good idea of the size and range of payday loan companies operating in the UK, comparison sites are a useful tool, as recommended in the OFT report - "We recommend that the Government works with industry groups to provide information on high-cost credit loans to consumers through price comparison websites. If this cannot be undertaken on a voluntary basis, the Government should consider the case for introducing legislation to create a single website allowing consumers to compare the features of home credit, payday and pawnbroking loans alongside credit unions and other lenders in their local area."

Broker fees

Due to high returns enjoyed by payday loans companies they employ vast broker networks. These are sometimes termed as a loanfinder service, and often include a broker fee, which is often payable upfront; meaning the applicant must pay a fee just to apply for an advertised loan. The Office of Fair Trading has pushed the government to tighten restrictions on the concept of payday loans. There are now websites that help applicants avoid paying the broker fees when applying for payday loans in the UK.

Criticism

There has been some technical evolution and criticism of the short-term loans market in the UK. Vince Cable MP said in 2008 that "The growing popularity of these kinds of short-term loans highlights the problems stemming from the credit crunch and unsustainable levels of personal debt in the UK." Chris Tapp, of debt charity Credit Action, said in mid-2008: "Over the past year, payday loans have become an issue in the UK, and the growth in people who have problems who have such a loan has been notable in the last six months."

Credit Action made a complaint to the UK Office of Fair Trading (OFT) that payday lenders were placing adverts on social network website Facebook which broke advertising regulations. Their main complaint was that the APR was either not displayed at all or not displayed prominently enough, which is clearly required by UK advertising standards.

In 2010 a campaign organised by pressure group Compass to "end legal loan sharking" and apply interest rate caps in the "high cost credit sector" saw over 100 MPs sign an Early Day Motion in September 2010, and over 200 by April 2011. Other motions on the subject have been made in previous years, and groups such as Debt on our Doorstep have previously highlighted the issue.